COMPANY OUTLOOKS TAKE PULSE OF THE ECONOMY
Mark Lister, 4 February 2019
February means one thing for the local investment community - the corporate reporting season. A plethora of our largest listed companies will announce results, with a handful due in the first two weeks before a landslide over the second half of the month.
Of all the information market watchers have at their disposal, outlook comments from management teams during reporting season are one of the most valuable.
Inflation figures, the unemployment rate and gross domestic product are all very useful, but they tell us more about the recent past that the future.
Outlook statements, on the other hand, provide an up to the minute view of what businesses are seeing at the coalface. This makes them one of the best leading indicators around, which is why many of us head straight to the end of the earnings release to find the section on current trading conditions.
We’ve seen a few announcements already, during the so-called “confession season” that precedes the official earnings releases.
Kathmandu was the first company this year to warn of a soft result, on the back of weaker than expected sales over the Christmas period.
Air New Zealand is the latest, last week cutting its earnings guidance by some 15 per cent on the back of weaker forward booking trends. The company has seen slower growth domestically, while inbound tourism traffic has also been below expectations.
Markets took notice of that, as what businesses are seeing in forward bookings and orders often tells us more about the future than any retrospective statistics can.
Z Energy and Sky City have had had better news in recent weeks, both guiding the market to stronger results after a strong finish to 2018. While the Z Energy profit upgrade has more to do with weaker oil prices than anything, the better performance from Sky City is due to a solid performance from the Auckland operations.
Overall, expectations are for steady earnings growth from corporate New Zealand. The median estimate for the 2019 financial year suggests an increase in profit of around five per cent. Respectable, but far from spectacular.
We’ll be looking for a number of things, but one of the big ones is evidence of cost pressures and what that might mean for profit margins.
With a tight labour market and evidence of increasing costs for many businesses, some will be facing a squeeze. This is particularly so for those who can’t pass higher costs on to customers, or when revenue trends are also working against them.
It will also be interesting to gather some insights into global economic conditions. These days, many of our companies are doing business all around the world, and if a slowdown in end markets is starting to bite, we’ll soon hear about it.
Despite a bounce late last year, business confidence is still languishing. The ANZ Own Activity measure slumped to a nine-year low in the middle of 2018, and in December it was still well below long-term averages.
If we get a similarly cautious tone from other management teams in February, that won’t bode well for the economy in 2019. Let’s hope Air New Zealand is the exception, rather than the rule.